Can credit-damaged buyers get home loans?
Julie Garton-Good, GRI, DREI

When A-grade loans were the only mortgage product available, only buyers with stellar credit could qualify.

But today, it's a whole new world. A majority of lenders are making B-, C-, even D-grade loans to borrowers who may be saddled with a range of blemishes from slow pays to bankruptcies.

Approximately 1.1 million people declared bankruptcy in 1996, making blemished credit (and money lent to less-than-perfect buyers) a customized growth industry for lenders.

Lenders would be the first to admit that heavy credit levels coupled with life situations out of a borrower's control--like illness, divorce and death in the family--have made picture-perfect credit rare. Wanting to make loans to all types of borrowers, lenders are finding that customized credit allows flexibility and greater rule-of-thumb reliability in evaluating less-than-perfect borrowers.

While all borrowers are evaluated on their own merits, most lenders want borrowers to have reasonably stable employment, fully documented income, assets and liabilities, and be purchasing or refinancing a single-family owner-occupied house or condo. In other words, it's good if blemished credit is somewhat offset by other stable, if not redeeming, qualifications.

What would C-grade credit look like? That borrower might have as many as six late payments on installment debts (car payments) and four late payments on revolving accounts (like credit cards) during the last 12 months--and could even have been late twice paying his mortgage during the past year. That's a considerably lower standard than what is required for A-grade loans.

Don't assume that lenders will embrace borrowers who can't explain why they were late making payments, especially if hay are chronically late payers. Lenders will still require explanations for slow payments in order to "sell" the loan to even a C-grade loan buyer.

When used to give credit-blemished buyers a "leg up" in the mortgage process, it's tough to beat the benefits of less than A-grade loans.